Why Older Consumers Won Big With The Fiscal Cliff Deal

Washington's effort to avoid the fiscal cliff did not involve a
grand deal that President Obama had sought, but the American
Taxpayer Relief Act, as it's called, certainly did involve a
grand compromise. And maybe we can breathe easy for a while.

But the new Congress will soon be greeted with renewal
brinksmanship and squabbles as it wrestles with raising the
federal debt ceiling and making spending cuts that were absent
from the fiscal-cliff fix.

In the meantime, older Americans have been spared any meaningful
hits, unless they make more than $400,000 a year ($450,000 for
couples). In this case, they will see big tax increases and also
reductions in allowable tax deductions. But for the rest of us,
the law hurriedly and reluctantly passed includes eight key
features of special interest.

No Social Security cuts. Lawmakers dropped
a proposal to use a less-generous price index to determine the
program's annual cost of living adjustment (COLA). This would
have reduced future benefit increases by roughly 3 percent a
year, adding up to an increasingly large benefit cut over time.

Meanwhile, the end of the temporary two-year reduction in an
employee's share of payroll taxes (from 6.2 to 4.2 percent of
covered payroll) removes a linkage between Social Security and
broader government funding that program defenders are glad to
see. They want Social Security to be treated independently of
broader deficit discussions. The program, they note correctly,
has never added a penny to federal spending deficits.

No Medicare sequestration cuts. The
automatic spending cuts set to occur will now be put off for two
months. That's hardly more than a temporary and small Band-Aid,
but it does spare seniors from a 2 percent cut in Medicare
spending.

"Doc fix" extended a year. Medicare
payments to physicians participating in the program were set to
drop by nearly 27 percent due to an existing law that tied their
payments to rates of inflation. This provision is regularly
extended by Congress and this latest fix will cost a projected
$10.6 billion this year. Payment cuts to hospitals and other
Medicare service providers will pay for the fix. They're none too
pleased with that, but consumers are not likely to be directly
affected. And those perennial threats by doctors to leave the
program can be shelved ... until the next time a fix is needed.

Funding for counseling and service help to disabled Medicare
beneficiaries was also included, the Center said. "Given that
less than one-half of those eligible for these benefits are
enrolled," Center President Joe Baker says, "extension of this
funding represents a critical step forward in building health and
economic security for some of the most vulnerable beneficiaries."

Investment tax rates. Tax rates on capital
gains and dividend income remain unchanged for nearly all
taxpayers—15 percent for most people and zero for taxpayers in
the 10-percent and 15-percent income tax brackets. For taxpayers
making more than $400,000 ($450,000 for couples), the rates rise
to 20 percent on both capital gains and dividends.

Estate taxes. Estates worth up to more than
$5.2 million (double that for couples) will be permanently exempt
from taxes under the new law, and the tax rate on amounts above
this is 40 percent. These terms are much more generous than those
supported by the White House and many Democrats. It is likely
that neither party will want to revisit this contentious issue
for a long time.

Roth IRAs. The two-month sequestration
delay carries a $30 billion price tag. To help pay about 40
percent of it (over 10 years, not two months), the new law
expands the ability of people with tax-deferred retirement
investment accounts to convert them into Roth IRAs if their
employer offers such accounts.

Roths are funded with dollars that have already been taxed but
future investment earnings are exempt from income taxes. The $12
billion in extra revenue expected from the provision comes from
the taxation of funds expected to be moved from tax-exempt
accounts into Roths. The text of the law says an employee may
"transfer any amount not otherwise distributable under the plan,"
indicating there are no income or other limits reducing the
amount of funds that can be transferred to a Roth.

Long-term care. One of the biggest flops of
health reform was its long-term care insurance program, known as
the Community Living Assistance Services and Supports (CLASS)
Act. It would have created a long-term care insurance program for
employees, but healthier people were deemed unlikely to enroll in
the program because it was made voluntary. If only sicker people
signed up, there was no way to operate the program without
incurring unacceptable deficits.

The new law formally ends the CLASS program. However, it does set
up a new study commission to develop a national plan for
providing long-term care to the nation's growing numbers of
seniors. Such a plan has long been called for by aging experts,
who note that the United States lags far behind other developed
economies in planning for its aging population.